A distribution company in Doral runs its warehouse with six employees on payroll and pays four delivery drivers and two weekend pickers on 1099s. The owner believes that keeps the business at six employees for workers’ compensation and spares it the payroll taxes on the rest. Then one of the drivers is hurt unloading a pallet at a customer’s dock. He has no insurance of his own, the company’s carrier says he was never on the policy, and the driver’s attorney argues he was an employee all along. On the facts, he probably was.
Paying someone on a 1099 does not make that person an independent contractor. Florida, like the federal government, looks at the actual working relationship, and the label on the paperwork carries little weight when the facts point the other way. For workers’ compensation, getting it wrong can mean penalties, an audit bill and an injured worker with nowhere to turn but the business.
Why the Label Does Not Decide It
Businesses use 1099 arrangements for good reasons, and many of them are legitimate. A licensed electrician who runs his own company, carries his own insurance, sets his own schedule and works for several customers is a genuine independent contractor. The problem is that 1099s are also used for people who work like employees: they show up when the business tells them to, use the business’s equipment, do the work the business’s way and work only for that business. When something goes wrong, the state, the carrier’s auditor and the courts look past the form to how the work was actually done.
How Florida Decides Who Is an Employee
Florida’s workers’ compensation law lists the factors that separate an independent contractor from an employee, and they track common sense. An independent contractor generally runs a separate business with its own place of business and equipment, has its own federal employer identification number, is paid by the job rather than by the hour, can make or lose money on the work, is responsible for completing the job, and pays its own business expenses. The more of those that are true, the more likely the person is a contractor. The more the business controls when, where and how the work is done, the more likely the person is an employee.
Construction is stricter. In construction, a worker who does not have his or her own workers’ compensation coverage or a valid exemption is generally treated as the contractor’s employee, and the independent contractor criteria are applied more narrowly. A general contractor that pays a crew on 1099s without checking coverage is, for workers’ compensation purposes, usually employing that crew. Our guide to workers’ compensation for Florida contractors and our article on the shell company problem in Florida construction cover how this plays out on job sites.
Other agencies use their own tests. The IRS, the Florida Department of Revenue for reemployment tax and the U.S. Department of Labor for wage and hour law each look at the relationship slightly differently, so a worker could be treated as a contractor for one purpose and an employee for another. For workers’ compensation, Florida’s statute is what counts.
What Misclassification Costs
The first cost usually arrives at audit. The carrier’s auditor reviews everyone the business paid for work, including 1099s. Workers who look like employees, or contractors without their own coverage, can be added to the policy’s payroll at the rate for the work they did, and the business owes the additional premium for the whole policy year. Our article on what to expect at a workers’ comp payroll audit explains how that happens.
The second cost is compliance. Misclassified workers count toward the four-employee threshold for non-construction businesses, so a company that believed it was below the line may have been required to carry coverage all along. Florida’s compliance investigators look at 1099 arrangements, and a business found without required coverage can receive a stop-work order and a penalty based on the premium it should have paid. Our articles on whether you need workers’ comp in Florida and stop-work orders explain the rules and the consequences.
The third cost is the injury itself. A worker who is really an employee and gets hurt can claim workers’ compensation benefits from the business. If the business had no coverage, or the worker was never included, the business may be responsible for medical bills and lost wages directly, and it may lose the protection from lawsuits that workers’ compensation normally provides employers. General liability policies exclude injuries to employees, so a business that guessed wrong about a 1099 worker may find that none of its policies respond.
Misclassification also reaches beyond workers’ compensation. Back reemployment taxes, federal payroll taxes and unpaid overtime claims under wage and hour law can all follow, and those claims can involve every worker treated the same way, not just the one who was hurt. Employment practices liability policies generally do not cover unpaid wages; our article on EPLI versus workers’ compensation explains what each coverage does.
Where Businesses Get Caught
Certain industries rely on 1099 arrangements more than others, and they are where misclassification shows up most. Construction and specialty trades pay helpers and crews this way. Delivery and courier businesses often treat drivers as contractors; see our article on insurance for delivery and courier businesses and our page on parcel delivery contractor insurance. Cleaning companies, landscapers, salons that rent chairs, home care agencies and event staffing companies all face the same question. Our article on cleaning and janitorial insurance covers that class.
Using Contractors the Right Way
A business can work with independent contractors without taking on their workers’ compensation, as long as the relationship is genuine and documented. Before a contractor starts, collect a certificate of insurance showing workers’ compensation coverage, or confirm a valid exemption in the state’s database, and check that it stays current. Use a written agreement that describes the work and how the contractor will be paid, and make sure the arrangement in practice matches what the agreement says. Keep the certificates with the payment records, because that is what the auditor will ask to see.
When the relationship looks like employment, the better answer is usually to treat the workers as employees and cover them. For businesses that need flexible labor, a staffing company or a professional employer organization can supply workers who are covered under that company’s policy; see our page on staffing agency insurance and our article on PEO workers’ comp in Florida.
What Business Owners Should Confirm
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Does each person you pay on a 1099 run an independent business, with their own equipment, tax ID and other customers?
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Do you control when, where and how they do the work?
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Do your 1099 workers carry their own workers’ compensation, or hold a valid exemption in the state database?
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Do you have current certificates on file for every contractor you paid this year?
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Would counting your 1099 workers put you at four or more employees?
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In construction, is every sub and helper covered by someone’s policy?
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Does the written agreement match how the work is actually done?
Workers’ Compensation With Prestige
Prestige Insurance Group places workers’ compensation for contractors, distributors, delivery companies, cleaning companies and small businesses across Miami, Doral, Fort Lauderdale, West Palm Beach, Orlando, Tampa and throughout Florida. We help clients sort out which workers need to be covered, prepare for audits and find carriers for classes that are hard to place, and we work with over 100 MGAs and specialty markets. For the full picture, see our page on workers’ compensation insurance in Florida. If you pay people on 1099s and are not sure where you stand, send us a short description of what they do and how they are paid, and we will give you a straight answer. Call the office nearest you. Se habla español.
Miami: 305-969-8776 Orlando: 407-993-2331
General information only, not legal or tax advice. Florida workers’ compensation law, federal and state tax rules and wage and hour law use different tests for employee status, and they change over time. Confirm your obligations with the Florida Division of Workers’ Compensation and consult qualified counsel or a tax professional regarding your workers.
